Q2 earnings growth is anticipated to be nearly 21 per cent, but with the S&P about five per cent overvalue – can it last? Peter Canelo, Chief Investment Strategist, Argus Research, talks to Sara D’Elia about why they believe stocks still have room to grow and which names they like. Argus Research reports are available on TD WebBroker.
Peter, we recently had you on the show talking about your outlook and your assessment of the US economy, including how you think that could impact stocks and bonds. I want to talk about your six investment themes for the second half of the year. You talked about liking financials, technology companies, consumer companies, industrials, and emerging markets. Let's talk first about financials. What are you watching there?
Well, we're always watching the yield curve. And people are concerned that long-term rates are very close to short and intermediate-term rates. The yield curve is flat. I don't think it has any impact on the economy. But it has an impact on bank profits.
And therefore, if we do see the bond yields rising-- and I'm pretty sure we're going to start that process here in the next few months-- that's going to be very good news for the bank stocks. BB&T in the Northeast is one of the names that we like. And PNC Financial. These are regional banks and they don't have these concerns about trade or currencies, et cetera. So they're pure play on what is going to be a very profitable shift in the yield curve in favor of fall financials.
A second segment is technology companies. Tell us a little bit about that.
Well, both technology and the consumer cyclicals-- the consumer discretionary area of the market have had the strongest earnings growth. Even before the tax cuts, they were the best part of the market. And remember, what we're talking about here is rising interest rates. So we're not going to see P/E ratios going up anymore. Hopefully they'll be steady, maybe they'll start to come down a little bit.
So how do you make money? You really need earnings to offset any kind of downward drag from lower P/E ratios. And we're clearly getting that in technology. We think both Apple and Salesforce.com should be very, very strong and continue to be very strong in this area. And in the consumer cyclical area, we also have Darden, the restaurants, and MasterCard, that will benefit from more jobs and more spending and a stronger consumer sector.
So lots of variability. You're talking about everything from restaurants to payments companies and banks. Let's move to industrials. Talk to us about the key themes or trends that you're seeing there.
Well, obviously what's happening around the world here on trade is important. The industrials-- Boeing, for example, got banged up as we're starting to talk about tariffs and trade wire, et cetera, et cetera. Our feeling is that the Chinese are going to blink. And they're going to blink because they have more to lose-- much more to lose. Our exports to China, not a big deal. Their exports to the US, to Europe are the highest in the world.
And so they're going to run out of things to put tariffs on because they don't buy that much from us. And so I think we're going to get better news out of China. They're going to come to their senses. There will be some kind of compromise. And that's going to be very bullish for the industrials like Boeing. And it's also going to be very bullish for a lot of the emerging markets.
I'm not sure about the Chinese market just yet, although there will be a good time to buy China. Right now, I'm looking at a very nice turnaround in Australia-- EWA on the MSCI ETF and Canada-- EWC on the MSCI ETF. And eventually I think we'll see Southeast Asia, China. The rest of the emerging markets are feeling a little bit better of this trade war talk. And I think it will be avoided.
I want to close things off, Peter, by asking you about some risks that you're watching. You mentioned trade and it's definitely impacted sentiment for investors over the last little while. What are some of the other things you think could derail what sounds like a pretty bullish outlook you have right now?
Certainly, I'm bullish. I think we'll see new highs in the US market in coming weeks-- certainly in the next few months. That predicates that we will be seeing some kind of compromise on trade. Secondly, we can't have any surprises from the Fed. And right now the market thinks every quarter they're going to hike rates 25 basis points. It can't be 50. It can't be more frequently. Anything that upsets the bond market is going to upset the stock market with respect to interest rates.
And the other key risk is if we start to have deficit worries. In fact, I think we're already beginning to worry about the deficits and the spending that we're going to be seeing. However, I think most of the risks that I see are more for the bond market, which is very overpriced. Yields should be much higher. They should be closer to 4-- 4 and 1/2%, and they're not even 3%. Whereas in the stock market, we're close to fair value-- 5% above.
And the market will continue to go higher historically until it's 8% to 20% above fair value. We think 15% above fair value is about as far as we're going to get this time. And so there will be some risks and there will be some worries about the interest rates and trades and deficits, et cetera. However, I think the market can continue to do better. And we should get up beyond 3,000 on the S&P-- maybe 3,100, 3,200 before the end of the year.
Peter, always a pleasure. Thanks very much for joining us.